Lower Milk Prices Are Not a Possibility but a Reality

October and November milk prices have declined from September’s high, but they cannot be compared with the large drop that will be seen in December.

This year is not yet complete, but very good milk prices may be a thing of the past for a while.

The November Class III price was announced at $21.94 and Class IV at $18.21. These are still good prices, but the inevitable is happening.

Lower prices were anticipated to materialize at some point in time, but came a bit more quickly than anticipated. October and November milk prices have been declining since the record high established in September, but they cannot be compared with the large decline that will be seen in December.

Seasonally, milk price declines from September or October through the end of the year, but a decline of over $4.00 per cwt from November to December will be difficult to comprehend. Not only will that be a large reduction in income, but it will be a decline of nearly $7.00 per cwt over a three-month period of time.

And that may not be all. Milk futures indicate lower prices as the next few months unfold. The tendency is to find someone or something to blame when we experience the cycle of lower prices. However, it is just a matter of supply and demand and its impact on the market. We have experienced an extended period of time of exceptional export demand as well as domestic demand. Not only does that tighten supply and increase prices, but it also spurs production worldwide. This is just a natural cycle of the market. Higher production will eventually result in lower prices.

For those of you who think you have missed the deadline to sign up for the Margin Protection Program (MPP), you have another two weeks to make a decision. The deadline was extended to Dec. 19 to allow more time to make a decision regarding signing up or to change the level of coverage that you may have signed up for. I want to put current prices in perspective to hopefully guide you in the decision of a level of coverage.

For the month of November, the preliminary average price for corn was $3.57/bu., for alfalfa hay it was $184.00 per ton, and for soybean meal in Central Illinois on rail was $441.39 per ton. The All-Milk price was $23.40 per cwt. These are the components used in calculating the income over feed cost used in MPP. Using the calculations set for MPP, it equates to a soybean meal price of $3.25, a corn price of $3.83, and an alfalfa hay price of $2.51. I rounded these numbers to the nearest cent per pound for ease of calculation. These numbers add up to $9.60. This number is then subtracted from the All-Milk price of $23.40, which gives us an income-over-feed cost of $13.80 for November. Keep in mind that these are preliminary numbers and will be adjusted on the December Agricultural Prices report except for the soybean meal price.

If feed prices remained stable, this would mean milk price would need to fall $5.80 before the $8.00 MPP level would kick in. With the November Class III price announced at $21.94, it could mean Class III would be $16.14 to reach an $8.00 income-over-feed cost. There are currently three months already below that level, according to futures prices. So, the potential of being paid under MPP at a higher coverage level is very real.

We must remember that the difference between the Class III or Class IV price to the All-Milk price is not always consistent. We must also remember that if the price of corn, soybean meal and alfalfa hay declines, the milk price will have to fall further before a payment will be received depending on the level of protection chosen.

There is no hard and fast rule for choosing which level to protect income over feed cost other than what works for your operation. It is important to remember that this program is not something that should be viewed as a way to make money but as a way to protect margin. Each individual needs to decide what level of margin he/she needs to protect in order to cash flow, and then sign up for that level and for the amount of milk that should be covered. Then use the futures and options market to protect a higher margin or the amount of milk that is not covered.

Upcoming reports

World Agricultural Supply and Demand report on Dec. 10

November Milk Production report on Dec. 19

November Cold Storage report on Dec. 22

November Livestock Slaughter report on Dec. 24

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.

This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this communication.

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Greg BooherOakfield, WI12/10/2014 08:22 AM

Robin does a concise analysis of the MPP. Producers who have not done much or any risk management in the past seem to have been over sold on the the capabilities of MPP. Taking a look at LGM-D demonstrates much more usefulness in this tool. We also should not just look at these two tools as using the CME tools are also still helpful and should be considered to tailor your risk management to your specific needs.
Greg Booher
Ledgeview Dairy Consulting Services